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I am about to release my first app to the iTunes store. What version of the iPhone/iTouch should I be targeting to hit the most people?

The default in XCode is 3.0.

+2  A: 

You should target the lowest dependency, if your application builds and works for the iPhone 3.0, you have a larger target audience who can download it. There isn't much different from 3.0 -> 3.1 API wise, so it would be best to target for 3.0.

Garrett
+2  A: 

OS 3.0 adoption is currently at about 47% (less among iPod Touch users), so I'd certainly recommend targeting 2.0 if at all possible.

Update: here's an article with the statics (this one actually puts iPhone adoption of the OS at 44% and iPod Touch at 1%).

conmulligan
Can you provide a link for this information please?
AngryHacker
I've updated the answer. Obviously the figures are somewhat fluid, but most estimates put adoption between 40% and 50%.
conmulligan
Note that those figures are from June, right after 3.0 came out, and are from Admob, whose stats come entirely from ad-supported free applications. People using such applications will be much less likely to upgrade, especially if there's any cost for that upgrade. As a counterpoint, Tapbots announced that 79% of iPhone and 50% of iPod touch users had upgraded at that time: http://tapbots.com/blog/news/iphone-os-30-adoption-rate . More recent statistics are required.
Brad Larson
+1  A: 

The iPhone OS is backward compatible with apps targeted to earlier SDK versions. So, if your app is built with 2.0, it will usually run on 3.0/3.1 without any problems (you should definitely test it though!). Thus, my approach is to always target the earliest possible SDK version, depending on the features needed in that app. If your app doesn't leverage any of the 3.0 stuff (such as push notifications, map view etc.), build with 2.0 or 2.2 - this way you reach much more people.

Daniel Rinser